Estate Planning Class Presentation

8/9/2019 Estate Planning Class Presentation

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ESTATE PLANNINGESTATE PLANNING

Attorney, C.P.AAttorney, C.P.A

Former IRS AttorneyFormer IRS AttorneyROBERT J. KOLASA, LTD.582 Oakwood Ave, Suite #200Lake Forest, IL 60045

(847) [email protected]

www.kolasalaw.com

By: Robert J. Kolasa
http://www.kolasalaw.com/http://www.kolasalaw.com/


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WHAT IS ESTATEWHAT IS ESTATE

PLANNING?PLANNING?

WHATWHAT

YOU OWNYOU OWN

GOES TOGOES TOWHOWHOYOU WANTYOU WANT

WHENWHENYOU WANTYOU WANT

HOWHOWYOU WANTYOU WANT


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Estate Tax PlanningEstate Tax PlanningThe Substantial Cost of Not PlanningThe Substantial Cost of Not Planning

Husband & Wife die in Illinois 2007:Husband & Wife die in Illinois 2007: Taxable Estate Taxes Taxable Estate TaxesEstate TaxesEstate Taxes

EstateEstate No PlanningNo Planning With PlanningWith Planning

$2,000,000 $0$2,000,000 $0 $0$0

$2,500,000 $295,685$2,500,000 $295,685 $0$0

$3,000,000$3,000,000 $542,003$542,003 $0$0

$3,500,000$3,500,000 $790,018$790,018 $0$0

$4,000,000$4,000,000 $1,039,692$1,039,692 $0$0


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Estate Tax Repeal? Business as Usual

TRA of 2001

Estate Tax Exemption

$2M for 2007, 2008

$3.5M for 2009

Estate Tax Repealed 2010 ?(carryover basis regimen)

Illinois Estate Exemptioncapped at $2 M

Gift Tax - $1M Exclusion

Prediction:$3.5 to $5M Exemption


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Custom Drafted TrustsCustom Drafted Trusts

Delayed Distributions Based on AgeDelayed Distributions Based on Ageor Educational Achievementor Educational Achievement

Drug, Alcohol or Impaired ChildDrug, Alcohol or Impaired Child

Educational Trusts for GrandchildrenEducational Trusts for Grandchildren

Planning for Second MarriagesPlanning for Second Marriages

Creditor ProtectionCreditor Protection

Disabled ChildDisabled Child Special Needs Trusts to Prevent Disqualification ofSpecial Needs Trusts to Prevent Disqualification of

Governmental BenefitsGovernmental Benefits


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Will $$$ Help or Hurt ?Will $$$ Help or Hurt ? My Wealth should not be aMy Wealth should not be a

DisincentiveDisincentive for Children to becomefor Children to becomeProductive Members of SocietyProductive Members of Society

I want my Children to Have enoughI want my Children to Have enoughtoto Do SomethingDo Something, not Enough to, not Enough to DoDo

Nothing!!!Nothing!!!


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Educational Trusts/Gifts to MinorsEducational Trusts/Gifts to Minors

Trust established during lifetime

Give up to $12,000 each year (adjusted for inflation)

Trust established after death - funded byportion of living trust assets (i.e., 25%)

Unlimited exclusion for gifts directly to schoolor medical provider

Trust May be Income Tax Defective

Grantor Pays Income Taxes

= Tax Free Additional Gift

Trust established duringlifetime

Give up to $12,000 each year (adjusted for inflation)

Trust established after death - funded byportion of living trust assets (i.e., 25%)

Unlimited exclusion for gifts directly to schoolor medical provider

Trust May be Income Tax Defective

Grantor Pays Income Taxes

= Tax Free Additional Gift


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Basic Estate Planning

Goals

Basic Estate Planning

Goals Making sure thatMaking sure thatWhatWhatyou own, goes toyou own, goes toWhoWhoyouyou

want,want,WhenWhenyou want andyou want and HowHowyour wantyour want Planning for DisabilityPlanning for Disability

Minimizing Estate and Gift TaxesMinimizing Estate and Gift Taxes

Minimizing Probate CostsMinimizing Probate Costs

HealthHealth--Care DecisionsCare Decisions


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Common EstatePlanning MistakesCommon Estate

Planning MistakesAssets Passing Outside Will or Trust

Improper Use of Joint Tenancy

Improper Beneficiary DesignationsWrong Executor or Trustee

Procrastination

Not Funding your Living Trust

Assets Passing Outside Will or Trust

Improper Use of Joint Tenancy

Improper Beneficiary DesignationsWrong Executor or Trustee

Procrastination

Not Funding your Living Trust

b


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Probate:

The legal process ofproving andadministeringa will

Probate:

The legal process ofproving andadministeringa will

Expensive

Time consuming

May delay distributions to beneficiaries

Court supervised

A matter of public record

Probate can be avoided!

Expensive

Time consuming

May delay distributions to beneficiaries

Court supervised

A matter of public record

Probate can be avoided!


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Revocable Living TrustBenefits for Survivors

Revocable Living TrustBenefits for Survivors

Avoids probate upon death

Avoids guardianship upon incapacity

Avoids or reduces Estate Taxes Protects inexperienced or incapable

beneficiaries from managing assets

Avoids probate upon death

Avoids guardianship upon incapacity

Avoids or reduces Estate Taxes Protects inexperienced or incapable

beneficiaries from managing assets


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Revocable Living TrustYou Can Be:

* Grantor, Trustee & Beneficiary

* No Loss of Control Over Assets

Trust Funding - transfer of legal titleto Trust for Trustee to administer

To reduce estate taxes, generally need tobalance Husbands and Wifes trusts


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Federal & IL Estate TaxesFederal & IL Estate Taxes

Current Law for 2007 Maximum Federal Rate = 45% Illinois Estate Tax (capped $2M) adds up to 24% more tax

First $2 M Exempt (Estate Tax Exemption) Single: No Estate Taxes if Assets Less Than $2 M

Married: No Estate Taxes if Assets Less Than $4 M

AND you Plan Correctly

Tax Reform Act of 2001

2009 - $3.5M Exemption2010 - Federal Estate Tax Repealed2011 - Estate Tax Reenacted w $1M Exemption??

Gift Tax retained with $1,000,000 Exclusion


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Estate Tax PlanningEstate Tax PlanningThe Substantial Cost of Not PlanningThe Substantial Cost of Not PlanningHusband & Wife die in Illinois 2007:Husband & Wife die in Illinois 2007:

Taxable Estate Taxes Taxable Estate TaxesEstate TaxesEstate TaxesEstateEstate No PlanningNo Planning With PlanningWith Planning

$2,000,000 $0$2,000,000 $0 $0$0

$2,500,000 $295,685$2,500,000 $295,685 $0$0

$3,000,000$3,000,000 $542,003$542,003 $0$0

$3,500,000$3,500,000 $790,018$790,018 $0$0

$4,000,000$4,000,000 $1,039,692$1,039,692 $0$0


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Transfer Tax ObjectivesTransfer Tax Objectives Effectively useEffectively use bothboth spouses exclusionsspouses exclusions

Avoid stackingAvoid stackingLess estate taxes ifLess estate taxes if

bothboth estate tax exclusions are usedestate tax exclusions are used

HIS Hers= Est at e and Gi f t Tax

Savings


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NO ESTATE TAX PLANNING(Presume both deaths 2007) Husband Wife

Dies 1st Dies 2nd

ASSETS $0 $4,000,000

UNIFIED CREDIT ($2,000,000) ($2,000,000)

NET ESTATE $0 $2,000,000

ESTATE TAX $0 $1,039,692$1,039,692

Husbands estate loses benefit of his $2 M credit.


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ESTATE TAX PLANNING(Presume both deaths 2007) Husband Wife

Dies 1st Dies 2nd

ASSETS $2,000,000 $2,000,000

UNIFIED CREDIT ($2,000,000) ($2,000,000)

NET ESTATE $0 $0

ESTATE TAX $0 $0

BothBoth $2 M Unified Credits are Utilized.$2 M Unified Credits are Utilized.


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Trust Drafting ChoicesTrust Drafting Choicesfor Estate Tax Planningfor Estate Tax Planning

Traditional A/B Plan;Traditional A/B Plan;

Disclaimer TrustsDisclaimer Trusts

Single Marital TrustsSingle Marital Trusts

Joint TrustsJoint Trusts(wave of the future?)(wave of the future?)


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Gifts can REDUCE Estate TaxesGifts can REDUCE Estate Taxes Outright Gifts (no strings)

Gifts in Trust (strings)

$12,000 per year, per beneficiary exclusion

$1,000,000 additional lifetime exclusion

Many Advanced Techniques are Gift DrivenGRATS & QPRTFLPsGrantor Trusts

Outright Gifts (no strings)

Gifts in Trust (strings)

$12,000 per year, per beneficiary exclusion

$1,000,000 additional lifetime exclusion

Many Advanced Techniques are Gift DrivenGRATS & QPRTFLPsGrantor Trusts


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Estate Tax ReducingTechniques

Estate Tax ReducingTechniques

Credit Shelter Trusts

Gifts

Irrevocable Life Insurance Trusts

Charitable Remainder Trusts

Foundations

Other Advanced Planning Techniques

FLPs, Grantor Trusts, QPRTs, GRATS, CLTs

Dynasty Trusts

Credit Shelter Trusts

Gifts

Irrevocable Life Insurance Trusts

Charitable Remainder Trusts

Foundations

Other Advanced Planning Techniques

FLPs, Grantor Trusts, QPRTs, GRATS, CLTs

Dynasty Trusts


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QPRTQPRTQUALIFIED PERSONAL RESIDENCE TRUSTQUALIFIED PERSONAL RESIDENCE TRUST

ResidenceResidence transferred to Trust for atransferred to Trust for a

Term of Years (i.e., 7 years)Term of Years (i.e., 7 years) Reduced Gift CostReduced Gift Cost of Transferof Transfer

Gift Reduced by Retained InterestGift Reduced by Retained Interest

End of Term, Gift CompletedEnd of Term, Gift CompletedGrantor can then Lease ResidenceGrantor can then Lease ResidenceLease Payments = Tax Free GiftsLease Payments = Tax Free Gifts

Death before Term = Gift IneffectiveDeath before Term = Gift Ineffective

No Worst off than if Nothing DoneNo Worst off than if Nothing Done


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QPRT ExampleQPRT Example

$2,000,000$2,000,000ResidenceResidence

Grantor Age 78Grantor Age 78 66--Year TermYear Term

5.8% AFR5.8% AFR

$943,620 Gift!!!$943,620 Gift!!!

$1,056,380 Gifted$1,056,380 GiftedTax FreeTax Free

Grantor can Rent toGrantor can Rent toTrust after 6 yearsTrust after 6 years


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GRATSGRATSGrantor Retained Annuity TrustsGrantor Retained Annuity Trusts

Similar to QPRTSimilar to QPRT PropertyPropertytransferred to Trust in Exchangetransferred to Trust in Exchange

for an Annuity Fixed # of Yearsfor an Annuity Fixed # of Years

Reduced Gift CostReduced Gift Cost of Transferof TransferGift Reduced by Retained InterestGift Reduced by Retained Interest

End of Term, Gift CompletedEnd of Term, Gift Completed

Death before Term = Gift IneffectiveDeath before Term = Gift Ineffective


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CRTCRTCharitable Remainder TrustCharitable Remainder Trust

A CRT enables an individual to:

Avoid capital gains taxesIncrease income

Receive income tax deduction

Receive estate tax deduction

Make substantial future contributionsto charity


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ILITILITIrrevocable Insurance TrustIrrevocable Insurance Trust

General RuleGeneral Rule: Life Insurance Proceeds: Life Insurance ProceedsSubject to Estate TaxSubject to Estate Tax

ExceptionException: Insurance in ILIT: Insurance in ILIT

Insurance Owner retains NO ControlInsurance Owner retains NO Control

Family Members are BeneficiariesFamily Members are Beneficiaries

Premiums = Gift to BeneficiariesPremiums = Gift to Beneficiaries

Transfer Existing Policy to ILITTransfer Existing Policy to ILIT

33--Year Waiting RuleYear Waiting Rule


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GOALSGOALS -- IRAIRA

Beneficiary PlanningBeneficiary Planning

INCOME TAX DEFERRALINCOME TAX DEFERRAL Stretch out IRA as Long as PossibleStretch out IRA as Long as Possible

CONTROL ISSUESCONTROL ISSUES Minor or Irresponsible ChildrenMinor or Irresponsible Children

22ndnd MarriagesMarriages

ESTATE TAX ISSUESESTATE TAX ISSUES

Is IRA needed to Fund $2M Estate TaxIs IRA needed to Fund $2M Estate Tax

Exclusion?Exclusion?


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BeforeBefore Death of IRA OwnerDeath of IRA OwnerUniform Lifetime TablesUniform Lifetime Tables

AgeAge Payout %Payout %7171 3.8%3.8%

7474 4.2%4.2%

7777 4.7%4.7%

8080 5.4%5.4%

8383 6.2%6.2%

AgeAge PayoutPayout%%8686 7.1%7.1%

8989 8.4%8.4%

9292 9.8%9.8%

9595 11.6%11.6%

9898 14.1%14.1%


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AfterAfter Death of IRA OwnerDeath of IRA Owner

Planning Makes a DifferencePlanning Makes a Difference

IRA Beneficiary Designation Controls RMDsIRA Beneficiary Designation Controls RMDs

Significant Differences in RMDs Depending onSignificant Differences in RMDs Depending on

WhoWho is IRA Beneficiaryis IRA Beneficiary Balancing FactorsBalancing Factors

Income Tax DeferralIncome Tax Deferral

ControlControl

Estate TaxEstate Tax


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Key Decisions inKey Decisions inPlanningPlanning

Primary BeneficiariesPrimary Beneficiaries Contingent BeneficiariesContingent Beneficiaries

Use of Trust as Primary or ContingentUse of Trust as Primary or ContingentBeneficiaryBeneficiary

Tax Planning Language in Trust & IRATax Planning Language in Trust & IRABeneficiary FormBeneficiary Form

WhoWho should be Primary IRAshould be Primary IRA


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WhoWho should be Primary IRAshould be Primary IRA

Beneficiaries?Beneficiaries? SpouseSpouse

Harmonious 1Harmonious 1stst

MarriagesMarriages StretchStretch--Out Benefits of Spousal IRA RolloverOut Benefits of Spousal IRA Rollover

Trust or Children are Secondary BeneficiariesTrust or Children are Secondary Beneficiaries

TrustTrust

22ndnd Marriages or Control IssuesMarriages or Control Issues

Less Income Tax DeferralLess Income Tax Deferral

Children or GrandchildrenChildren or Grandchildren

CharitiesCharities -- No Income Tax Paid on GiftNo Income Tax Paid on Gift


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IRA Beneficiary Guidelines

StatusStatus FactorsFactors PrimaryPrimary SecondarySecondary

MarriedMarriedHarmonious MarriageHarmonious Marriage

IRA not needed to fundIRA not needed to fund$2M Estate Tax Trust &$2M Estate Tax Trust &Children are ResponsibleChildren are Responsible

ChildrenChildren

22ndnd Marriage, orMarriage, or

Want Trust ControlWant Trust ControlResponsible ChildrenResponsible Children

Young or IrresponsibleYoung or IrresponsibleChildrenChildren

SpouseSpouse

SpouseSpouse

TrustTrust

MarriedMarried TrustTrust

TrustTrust

N/AN/A

SingleSingle ChildrenChildren

TrustTrust

N/AN/A


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Asset ProtectionAsset Protection

Creating HurdlesTo PreventCreditors fromSeizing Assets

Does not involve Fraud, Perjury,

Excessive Secrecy or FraudulentTransfers

Own Property in Protected Form to

take away the economic incentivefor a lawsuit against you


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LIABILITYLIABILITYINSURANCEINSURANCE

General RuleGeneral Rule

PurchasePurchase as muchas much as possibleas possible

Every HouseholdEvery Household Umbrella Insurance policyUmbrella Insurance policy** $2 Million to $5 Million$2 Million to $5 Million

Every BusinessEvery Business

Liability Insurance PolicyLiability Insurance Policy


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Common MistakesCommon Mistakes General PartnershipsGeneral Partnerships ((notnot LLPs/LLCs)LLPs/LLCs)

(Joint & Several Liability Other Partners)(Joint & Several Liability Other Partners)

Spouse Involved in BusinessSpouse Involved in Business

Personal GuaranteesPersonal Guarantees TaxesTaxes (Income, Employment Taxes)(Income, Employment Taxes)

SingleSingle--Member LLC that should have TwoMember LLC that should have TwoMembers for Outside In ProtectionMembers for Outside In Protection

NonNon--Separation of RisksSeparation of Risks


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Fraudulent TransfersFraudulent Transfers

Once Liability Occurs, CreditorsOnce Liability Occurs, Creditors

may Void Transfersmay Void Transfers

After Transfer Is DebtorAfter Transfer Is DebtorSolvent?Solvent? Assets > Liabilities?Assets > Liabilities?

Did Debtor receive ReasonablyDid Debtor receive ReasonablyEquivalent Value?Equivalent Value?


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GiftsGifts SimpleSimple

Outright or Gifts in TrustOutright or Gifts in Trust Gifts to Less Vulnerable SpouseGifts to Less Vulnerable Spouse

Gifts to ChildrenGifts to Children (in trust?)(in trust?)

ProblemsProblems

Loss of ControlLoss of Control

DivorceDivorce

Donee is SuedDonee is Sued

Gift Tax (N/A spousal or incomplete gifts)?Gift Tax (N/A spousal or incomplete gifts)? Constructive Trusts & Fraudulent Transfer?Constructive Trusts & Fraudulent Transfer?

Drafting Trusts forDrafting Trusts for


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Drafting Trusts forDrafting Trusts for

Asset ProtectionAsset Protection Powers of Appointment to Change TrustPowers of Appointment to Change Trust

Multiple Beneficiaries & TrusteesMultiple Beneficiaries & Trustees

Trustee Power toTrustee Power to Suspend DistributionsSuspend Distributions

Financial hardship; Alcohol or Drug AbuseFinancial hardship; Alcohol or Drug Abuse

Shifting TrustsShifting Trusts upon Triggering Event upon Triggering Event Insolvency, Bankruptcy, Creditor ActionInsolvency, Bankruptcy, Creditor Action

Beneficiarys Interest Ends or Changes to Discretionary TrustBeneficiarys Interest Ends or Changes to Discretionary Trust

Impose aImpose a Condition PrecedentCondition Precedent to Distributionsto Distributions

Solvency or Distributions Match Beneficiarys EarningsSolvency or Distributions Match Beneficiarys Earnings

Beneficiary ControlledBeneficiary Controlled


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Beneficiary ControlledBeneficiary Controlled

TrustTrust Superior Asset ProtectionSuperior Asset Protection

vs. Outright Gift vs. Outright Gift

Independent TrusteeIndependent Trustee ororCoCo--Trustee?Trustee?

Beneficiary Controlled atBeneficiary Controlled atCertain AgeCertain Age

Upon beneficiarys death,Upon beneficiarys death,passes tax free to lowerpasses tax free to lowergenerationgeneration


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Major IL Creditor ExemptionsMajor IL Creditor Exemptions(Judgment Creditors & Bankruptcy)(Judgment Creditors & Bankruptcy)

Tenancy by Entireties (Real Estate)Tenancy by Entireties (Real Estate) Life Insurance & AnnuitiesLife Insurance & Annuities

Death ProceedsDeath ProceedsCash Value if payable to Debtors DependentCash Value if payable to Debtors Dependent

Retirement PlansRetirement PlansCovers most Retirement PlansCovers most Retirement Plans

IL T B h E i iIL T B h E i i


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IL Tenancy By the EntiretiesIL Tenancy By the Entireties

Real EstateReal Estate Husband and WifeHusband and Wife

OwnershipOwnership

Principal ResidencePrincipal Residence

Obtain Protection byObtain Protection byDeedDeed

Creditor of One SpouseCreditor of One SpouseCannot EnforceCannot EnforceJudgment DuringJudgment DuringMarriageMarriage

Debts not ProtectedDebts not Protected Injuries on premisesInjuries on premises

Dog bitesDog bites

Teenagers ActionsTeenagers Actions

IRS debtsIRS debts


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ASSET PROTECTIONASSET PROTECTIONENTITY SELECTIONSENTITY SELECTIONS

LLCLLC (Limited Liability Company)(Limited Liability Company)

S CorporationS Corporation

C CorporationC Corporation

Above EntitiesAbove Entities -- Liability ProtectionLiability Protection** Personal AssetsPersonal Assets of Owners not Personallyof Owners not Personally

Liable forLiable for Business DebtsBusiness Debts** N/A to Personal Guarantees, Torts andN/A to Personal Guarantees, Torts and

Malpractice.Malpractice.

I id O tI id O t P t tiP t ti


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Inside OutInside Out ProtectionProtectionProtects Owners from Internal LiabilitiesProtects Owners from Internal Liabilities

BusinessRisks

Corporations & LLCs

Business Risks Do Not Taint Personal Assets(Owners no Personal Liability for Business Liabilities)

No Protection for Guarantees, Torts, Malpractice &LLC Distributions to Members during Insolvency

Outside InOutside In ProtectionProtection


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Outside InOutside In ProtectionProtectionProtects LLC from External Liabilities

LLC

Non-LLC Risks Do Not Taint LLC Assets

Not Available to Corporations(Creditors can Seize Stock)

Charging Order = Creditors Remedy

Non-LLC CreditorsNon-LLC Creditors

When To Check Your EstateWhen To Check Your Estate


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When To Check Your Estate

Plan

When To Check Your Estate

Plan

Births and deaths

Moves between

states

Marriages

Changes in yourassets

Births and deaths

Moves between

states

Marriages

Changes in yourassets

Divorces

Business

changes

Inheritance

Tax law changes

Divorces

Business

changes

Inheritance

Tax law changes

KeepKeep


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There are two systems oftaxation in our country; onefor the informed and one forthe uninformed.

(Judge Honorable Learned Hand - Appeals Court Justice)

There are two systems oftaxation in our country; onefor the informed and one forthe uninformed..

(Judge Honorable Learned Hand - Appeals Court Justice)

p

Money InThe

Family

p

Money InThe

Family


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THE END!!!THE END!!!

Free LegalFree LegalConsultationConsultation

Estate PlanningEstate Planning

Asset ProtectionAsset Protection

Thank YouThank You

LAW OFFICES OF ROBERT J. KOLASA, LTD.

Estate Planning Class Presentation

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